Beware of Obama No Mics

8/13/2019 Beware of Obama No Mics

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BEWARE OF

OBAMANOMICS

E U R O PA C I F I C C A P I T A L , I N C .

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Founded in 1980, and headquartered in Darien, CT, Euro Pacific Capital is afull service, FINRA-registered broker/dealer. Its president, Peter Schiff, is anationally known financial expert. He has authored 2 best selling books,Crash Proof: How to Profit in the Coming Economic Collapse, and The LittleBook of Bull Moves in Bear Markets.

Euro Pacific has 6 offices nationwide. The firm offers investment strategiesbased on the economic and financial philosophy of Peter Schiff.

ABOUT THEAUTHOR

Thomas E. Woods, Jr., a senior fellow at the Ludwig von Mises

Institute, holds a bachelors degree in history from Harvard and

his masters, M.Phil., and Ph.D. from Columbia University. Heis the author of nine books, most recently theNew York TimesbestsellerMeltdown: A Free-Market Look at Why the StockMarket Collapsed, the Economy Tanked, and GovernmentBailouts Will Make Things Worse, which features a foreword

by Congressman Ron Paul. Click hereto read a free chapter ofMeltdown, andvisit Tom atTomWoods.com.
http://www.meltdownthebook.com/offers/offer.php?id=MEL001http://www.thomasewoods.com/http://www.thomasewoods.com/http://www.meltdownthebook.com/offers/offer.php?id=MEL001


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and as a consequence they suffered what was called the lost decade where essentially for

the entire 90s they did not see any significant economic growth.

As usual, unfortunately, our president draws the wrong lesson from history. Japan

actedtoo boldly and swiftly. Tens of trillions of yen in stimulus packages, combined with

propping up failing companies, lowering interest rates to zero, and much additional interven-

tion besides,had nothing to show for it other than making Japan the most indebted country

in the developed world. Keynesians desperate to find some reason that their entire slate of

proposals failed to elicit a response from the Japanese economy try to argue that Japan didnt

nationalize its banking sector fast enough.But when Japan did start nationalizing its banks, it

then endured the two worst years (1998 and 1999) of the whole lost decade.1

Shortly after taking office, President Obama urged the Congress to approve a stim-

ulus package amounting to $787 billion in order to (he said) restore the economy to health.

In his first news conference as president, Obama warned that a failure to pass this billcould turn a crisis into a catastrophe. I can tell you with complete confidence, he con-

tinued, that a failure to act will only deepen this crisis as well as the pain felt by millions of

Americans. (For the projected deficits resulting from Obamas spending plans, see Fig. 1.)


FIGURE 1

Source:Washington Post; CBO, White House Office of Management and Budget


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But, fashionable superstitions notwithstanding, government spending that is,

draining resources from the productive sector and devoting them to arbitrary projects

cannot improve the economy. It can only make things worse. So blinded are Keynesian

economists, from whom Obama takes his inspiration, by the view that prosperity is at-

tributable to spending per se that they predicted a return to depression conditions whenWorld War II spending came to an end. And indeed in 1946, the year after the war

ended, the budget was cut by two thirds. But instead of reverting to depression, what oc-

curred instead wasthe single most robust year the private economy has ever seen .2

What the economy really needs, contra Obama, is not government stimulus

spending to try to revive it as it is. We should not want to stimulatewhat should now be

obvious to everyone was an unsustainable economy.That only encourages it to continue

along a false path whose inevitable abandonment in the future will be all the more painful

thanks to our insistence on propping it up now. As well see, what the economy instead

needs is a market-drivenrestructuring, in which bubble activities shrink and resources arereallocated into lines of production that conform to what consumers want and can afford.

Where the Bust Came From

How, after all, did we get into this slump? The key culprit is the Federal Reserve

and its loose monetary policy.3 The new money created by the Fed under Alan Greenspan

in the years following 9/11 went overwhelmingly into the housing market, inflating prices

to unheard-of levels (see Fig. 2). According to the faulty conventional wisdom that rapidly

took hold, this rise in prices was a sustainable phenomenon that would persist into the fu-

ture, not an artificial bubble destined to burst. The so-called experts told Americans that

their homes were bound to appreciate, that a house was the best investment they could

make, and that flipping houses was a sure money-making opportunity.

With home prices rising in tandem with peoples stock portfolios (another bub-

ble), Americans felt wealthier than they really were. They made consumption decisions

on the basis of those faulty estimates that they have since come to regret. Some business

enterprises that began or expanded under the conditions of the boom could continue

profitably only as long as the boom lasted and consumers artificially stimulated excess

spending went on. With reality now reasserting itself that is, with easy credit no longerso readily available, and with people now making their spending decisions in light of the

decreased wealth they now realize they have the market is trying to clear away these

bubble activities, so that their resources can be made available for use by the real wealth

generators in the economy.



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The market, in short, is trying to move consumers away from personal finance

models based on indebtedness and too much (and/or the wrong kinds of) consumption,and toward more saving and a sustainable level of consumption. To accommodate this

shift, labor and capital will need to be reallocated out of some sectors and into other

ones. Stimulus spending only disrupts and confuses this purgative process, by misdi-

recting resources into arbitrary projects and artificially stimulating politically favored in-

dustries at the expense of the economys healthy and productive sector. Obamas program

for recovery, such as it is, looks instead to reinflate the bubble, keep the spending spree

going, and give still more artificial stimulus to debt while providing disincentives to save.

It refuses to allow the market to correct the unsustainable excesses in the economy. No

scheme which has ever been devised by them has ever made a collapsed boom go up

again, said William Graham Sumner in 1896. Nothing in the historical record since

then has altered that verdict.

The Federal Reserve, meanwhile, acting on the basis of the same economic princi-

ples laid out by the president, is likewise trying to repair the economy by engaging in


FIGURE 2

Source: Financial Wisdom, http://www.newfinancialwisdom.com/median-home-prices-inflation-adjusted; data from Robert J. Shiller,Irrational Exuberance


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more of what caused the problems in the first place. On March 18, 2009, the Federal

Open Market Committee (FOMC) announced it would purchase up to $300 billion in

long-term government bonds, with the intent of lowering mortgage rates and other rates

on consumer debt. It also declared its intention to purchase up to $750 billion in mort-

gage-backed securities guaranteed by Fannie Mae and Freddie Mac. Instead of allowingthe market to restructure along a sustainable path, the Fed instead seeks to keep home

prices inflated, prop up the securitization model (on which the market is trying to render

its negative verdict), and encourage more borrowing and debt.

Stimulus Spending Doesnt Work Or Make Sense

On a more basic level, the jobs that government creates are unprofitable that

is, they consume more resources than they produce. If that werent true, then the

profit-seeking private sector would be funding them already. In fact, its impossible for

government to know whether it is engaged in profitable, productive activity, since itlacks a profit-and-loss mechanism whereby it can calculate whether it is making effi-

cient use of resources. Stimulus packages therefore drain the productive economy of

resources in order to subsidize money-losing ventures. Because these money-losing

ventures get resources shifted to them, fewer resources are available for use by the pro-

ductive economy; and since the government sector uses resources less efficiently than

the private sector, the net result is a decline in wealth a fact no magical multiplier

effect can overcome.

The more sophisticated Keynesians will come back with the argument that gov-

ernment stimulus can kick-start idle resources that werent being employed in any pro-

duction process anyway. But how can it do that? Our idle resources include, for instance,

some of our automobile production capacity, some construction capacity, some of our fi-

nancial services sector, and the like, as well as a wide variety of types of labor. Now

Obamas stimulus package includes (for example) money to weatherize 2 million Ameri-

can homes. How can weatherizing homes put these and only these idle resources to

work? It cant, of course. And are there enough unemployed weatherizers to take these

jobs, or will we be drawing labor from its current uses in the private sector? The question

answers itself. In other words, the weatherizing job will have to draw from already em-

ployed factors of production, thus redirecting them to a less urgently demanded use thanthe one the market was already employing them for. That does not create stimulus. It

destroys value and wealth. And if the claim is that the money spent on weatherizing

homes will eventually trickle down, somehow, to the unemployed workers in these other

fields, it is hard to take such a crude mechanism seriously.



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If we did happen to have enough unemployed weatherizers to weatherize peoples

homes, then why would we need Obamas stimulus package to force laborers and cus-

tomers together? If prices were allowed to adjust freely, people wanting their homes

weatherized would find the weatherizers on their own, and thus the effort to stimulate

these transactions would become superfluous.

The Bailouts Continue

Barack Obama won the White House on a promise of change we can believe in,

but his approach to the economic crisis has been more of the same, including continued

bailouts of failed institutions. As with so many other federal efforts, once the federal gov-

ernment spends a certain amount on a doomed enterprise, it feels compelled to continue

the effort. We cant stop now, the argument goes, since weve already invested $180 bil-

lion in AIG.Thats the bottomless pit that the bailout mentality, perpetuated by Obama,

inevitably leads to. Instead of punishing every economic actor in America, Obama shouldlet the losses from AIG fall on those who incurred them. If that means a string of bank-

ruptcies, then so be it: after years of wild risks rewarded by bailouts, large institutions

could stand a salutary reminder that ours is a profit and losseconomy. With the foolish

gamblers of AIG rebuked by the market and out of business, major market actors might

think twice about taking unwise risks in the future. Only then would we lay the founda-

tions for a sound, robust, and sustainable economy in the years to come.

On March 23, Treasury Secretary Timothy Geithners unveiled his proposal to as-

sist the banks by taking legacy assets the Newspeak term for toxic assets off their

books. Some 93 percent of the funding for this initiative would come from the taxpayer

in one form or another. This kind of gimmick does not in fact make the losses associated

with these assets magically disappear. It merely spreads out the losses, so that innocent

and prudent third parties are made to share the bill with the foolish and reckless individ-

uals whose poor decisions caused the problems. The hope is that shifting these assets

onto the backs of the taxpayers will unclog the credit markets and get lending flowing

once again. But the banks surely realize that Americans, by and large, have already bor-

rowed more than they can pay back. Legacy assets or no legacy assets, the flow of credit

is going to be allocated with greater prudence in the short run. (In the long run the les-

sons of the past will be forgotten as they have been, without fail, throughout Americanhistory and the reckless lending that the Feds easy money policy makes possible will

start up once again.) Whats more, with various mortgage re-sets due to take place over

the next couple years, the banks inventory of bad assets will continue to rise.



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Simply recognizing the true values of previously mispriced assets leaves the

amount of physical stuff in the economy unchanged. It could well lead to bankruptcies

for some institutions, but that would mean only that the distribution of that unchanged

amount of wealth would shift from one group of people to another group of people.

Bankruptcy courts would establish new ownership, and economic activity could then re-sume on a new and sound foundation. There would be short-run pain, to be sure, but

government policy can no more abolish pain than it can strike down the law of gravity.

Obama: What I Wont Do

So now we know Obamas intentions for starters: spend, rely on the Fed to cre-

ate lots of new money, and prop up failing companies. Now for what hewontdo.

What I wont do, the president said, is return to the failed theories of the last

eight years that got us into this fix in the first place, because those theories have beentested and they have failed.

What theories can the president have in mind? The past eight years saw massive

increases in government spending, massive money creation by the Fed, and massive bor-

rowing from abroad. Which one of those does the president plan to discontinue? Which

one would he even slow down?

What Obama means, of course, is that the supposedly free-market policies of the

past eight years have failed. The president is merely repeating the conventional wisdom,

which holds that free-market economists have egg on their faces right now, with their

cherished system crumbling before their eyes. The opposite is true. Which economists

were most likely to have predicted the present fiasco? The free-market economists of the

Austrian School, who warned that when the governments central bank tampers with the

markets structure of interest rates, the result is systemic error on the part of businessmen,

consumers, and investors.The faulty interest rates mislead investors into beginning proj-

ects that require more saved resources to complete than the economy actually has, and for

whose ultimate products insufficient consumer demand exists. In the recent housing bub-

ble, as we noted earlier, the Feds low interest rate policy, combined with government

stimulus to homeownership, spawned an artificial boom in housing that made consumers

think they were richer than they really were, thereby misleading them into making con-sumption decisions many have since come to regret.4

Economist Mark Thornton, who called the housing bubble back when the author-

ities denied the very possibility of a national bubble in real estate, uses three graphs (Figs.



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Had the Fed not created all that new money (which is then multiplied through the

fractional-reserve system), the market would have stopped the housing bubble in its

tracks. Faced with an inordinate demand for mortgage loans, banks would have found

their supply of loanable funds rapidly depleted. As a result, interest rates would have shot

up, and further speculation in real estate would have been arrested. These high interest

rates, its worth pointing out, would have encouraged people to save, and those increasedsavings would have provided the genuine wherewithal for any further home lending to

take place. (Remember that old-fashioned idea that resources need to be saved by some-

one first before someone else can borrow them?)

To make matters worse, the economy of the past eight years operated under the

implied promises of the Greenspan put, which important market actors took to mean

that there was a floor beneath which the Fed would not permit asset prices to fall.The

Financial Timesspoke in 2000, in the wake of the dot-com boom, of an increasing con-

cern that the Greenspan put was injecting into the economy a destructive tendency to-

ward excessively risky investment supported by hopes that the Fed will help if things gobad. Since Alan Greenspan took office, writes economist Antony Mueller, financial

markets in the U.S. have operated under a quasi-official charter, which says that the cen-

tral bank will protect its major actors from the risk of bankruptcy. Consequently, the rea-

soning emerged that when you succeed, you will earn high profits and market share, and


FIGURE 5

Source: Mark Thornton, Ludwig von Mises Institute


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if you should fail, the authorities will save you anyway.

This is not exactly the free market at work. Neither are Fannie Mae and Freddie

Mac, the Community Reinvestment Act, and the 101 other ways the federal government

has poured fuel on our financial fire.

Green Jobs

Another well-known plank of the Obama economic plan involves the creation of

green jobs, which will employ Americans in lines of work related to climate change

abatement and the transition from the use of fossil fuels to renewable energy sources. For

the sake of argument, well leave aside the scientific debate over climate change and the

extent to which human activity influences it, and the scientific merit of the claims made

on behalf of alternative forms of energy. What matters here is that supporters of the pres-

idents plan argue that these artificially created jobs will be good for the economy; pro-gressive think-tanks have produced studies purporting to show the wonderful effects the

presidents initiative will have on employment and economic prosperity.

These studies, though, are filled with every economic fallacy in the book. The

green jobs spoken of are treated as if they amount to a raw increase in the amount of

employment in America, without acknowledging that (1) the people taking these jobs will

often be leaving other ones behind, yielding no net increase in employment, and (2) the

private sector will now have to compete with these government-subsidized jobs for scarce

labor. The emphasis on greenjobsis itself misplaced, since it suggests that the sheer num-

ber of jobs in a particular industry is something to cheer. From a purely economic pointof view, it is not a sign of progress to move to a more labor-intensive energy industry,

since doing so merely draws employment away from the production of other goods and

makes society poorer: wed have the same amount of energy, but less of other things.

Moreover, when the Council of Mayors estimates the growth in green jobs from

750,000 to 4.2 million in 2038, it overlooks the issue of labor productivity. If productivity

growth continues at its average annual rate of 2 percent (an average observed from 1970 to

the present), then the number of green jobs in 2038 is cut almost in half, to 2.3 million.5

Cornered by these facts, advocates of green jobs would doubtless retort that en-couraging renewable energy sources however hopeless a project it probably is is an end

in itself, regardless of its effects on employment. Even if that were true, the point is that

these measures are being urged on us right nowon economic grounds, which crumble at the

slightest scrutiny.



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What Should Be Done vs. What Will Be Done

For the sake of American prosperity, Obama should consider the one path the po-

litical establishment has not considered: allowing the free market to allocate capital and

labor, to price assets, and to choose winners and losers. The recovery would be swift incoming, as it always is when the market is allowed to operate. And economic success

would once again be the product of hard work and entrepreneurial skill, not cultivating

political connections in Washington.

As usual, the politicians have other ideas: bail everyone out, try to reinflate the bub-

ble, squander more resources on arbitrary projects, reward borrowing and debt, and create

lots of new money. Every one of these measures props up bubble activities and undermines

genuine wealth-generating activities.The bailouts allocate capital away from the prudent

and competent and toward the imprudent and incompetent, from the wealth creators to

the wealth destroyers.The fiscal stimulus fritters away scarce resources on money-losing(that is, value-destroying) projects. Making debt more attractive encourages more of the

behavior that brought us to this unhappy impasse, thereby guaranteeing a worse bust in the

future. Printing up new money does not magically create new real resources in the econ-

omy. It merely redistributes the existing pool of resources into a configuration that does

not correspond to real consumer demand. It diverts resources into artificial activities with

which genuinely wealth-generating activities are then forced to compete.

In short, the presidents program aggravates every existing problem in the

American economy, and will make

genuine recovery all the longer in

coming. Whether we measure these

policies against history or sound

economic theory, the verdict is the same:

the president has chosen a path that is

guaranteed to fail. We were already on

that path before his election. Only if

President Obama genuinely changes

course, and allows the f ree economy

to restore the prosperity that so muchprevious intervention served to under-

mine, would we really have change we

can believe in.


With 6 offices nationwide, EuroPacific can help with yourinvestment decision making. If youare concerned about some of theissues raised in this report, contactus. Like you, we are disturbed bymany of these same issues, and mayhave strategies to help you with theinvestment decisions critical in the

perilous times ahead. CLICK HEREhere to arrange a call with a EuroPacific financial advisor.
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1Benjamin Powell, Avoid Japans Mistakes, Washington Times, March 8, 2009.

2Robert Higgs, Depression, War, and Cold War: Studies in Political Economy(New York: OxfordUniversity Press, 2006), ch. 5; Richard K. Vedder and Lowell Gallaway, The Great Depression

of 1946, Review of Austrian Economics5, 2 (1991): 3-32.3For an overview of how artificial credit creation by the Fed produces an economic boom thatinevitably ends in a bust, see Thomas E. Woods, Jr.,Meltdown: A Free-Market Look at Why theStock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse

(Washington, D.C.: Regnery, 2009), ch. 4.

4Against those who would exonerate the Fed of blame for the fiasco, see Robert P. Murphy, Evi-dence that the Fed Caused the Housing Boom, Frank Shostak,Is There a Glut of Saving? andRobert P. Murphy, Did the Fed, or Asian Saving, Cause the Housing Bubble?

5On green jobs, see the excellent study by Robert Michaels and Robert P. Murphy, Green Jobs:

Fact or Fiction? Institute for Energy Research, January 2009, http://www.instituteforenergyre-search.org/green-jobs-fact-or-fiction/.

E U R O P A C I F I C C A P I T A L , I N C .

10 Corbin Drive, Suite 3B, Darien, Ct. 06820

www.europac.net

Beware of Obama No Mics

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